Our generation has not previously experienced inflation. Most of us are not hugely concerned whilst relying on our parents for satisfying our needs, and thinking of future stages of studies. The latter of Gen Z have started working, and for millennials inflation has hit for the first time during their lifespan. For Gen Z-ers growing up in an era of an average 2% inflation, the reality is that we do not know what it is really like. The past resilience to spend is missing, along with the ability to budget long term.

Boiled down to its essence, inflation is a process of rising prices – or, to be more precise, the devaluation of money. If inflation is at 5% (5.1% is the current level of inflation in the United Kingdom) prices are 5% higher than a year ago – so, on average, the same thing that used to cost £100 is now priced at about £105.

This may not seem like a big issue, but amassed over time, inflation makes a huge difference. For example, in 1837, when slavery was being abolished in the UK, the Slave Compensation Act was signed into law and £20 million was spent on compensation (sic!) for slave owners across several British colonies.

Inflation is measured by governmental statistical agencies – the Office for National Statistics (ONS) in the UK, Eurostat in the European Union, Bureau of Labour Statistics in the United States – by using various indexes. The one most commonly used is Consumer Price Index (CPI) which measures the rise of prices across 700 goods and services, including, among other things, food, transport and entertainment. This ‘basket is reviewed every year because peoples tastes and spending habits change over time, for example in 2021 hand sanitiser, smart watches and home weights were included. There are other indexes, with baskets assembled to reflect experience in different parts of the economy.

Inflation in itself is not considered good or bad, it is a phenomenon which is linked to wider macroeconomic processes. What is considered problematic is excessive inflation, which could spiral out of control. In Turkey for example, annual inflation is now at 36%, a level which wreaks havoc on everyday life, as savings diminish, planning household or firm budgets becomes enormously difficult and number of people find out that they can no longer afford to have their basic needs met.

Historically, the record levels of inflation were noted in Berlin after World War 1, when the price of a loaf of bread rose from 160 marks to 2 billion marks between 1922 and 1923.

A ‘healthy’ inflation is considered to stand at around 2% annually – this is the target set for the Bank of England, an institution responsible for monetary policy in the United Kingdom. 2% is considered to be stimulating economic growth, not to be dangerous for consumers and to be far enough from the risk of going into deflation (whereas inflation is negative and hugely impedes economic growth).

To control inflation, central banks will use interest rates. Fundamentally, an interest rate says how much money will cost – the higher the interest rate, the higher the amount a lender charges a borrower to loan any amount of money. As the availability of money falls down, so does inflation – but also the entire economy cools down.